Two decades lost in pricing power


No matter how much travel writers, Congress and passengers complain about rising fares, they are still getting a bargain as airline officials know painfully well. Even so, the number of articles proclaiming doom and gloom continue to rise even as the industry has lost more than two decades of pricing power, according to a new analysis by AirlineFinancials.com.

  • The cost of air travel in the US has declined by 9.9% between 1990 and 2009, while other forms of transportation have continued to rise in price.
  • The average passenger revenue per mile for US airlines has remained in the range of 12.0 cents to 14.6 cents during the same period.
  • Frequent flyer and promotional programs contribute to the pressure on airlines, with only about 25% of first-class passengers paying full fare.
  • The rising tax burden in the US contrasts with the elimination of the provincial aviation fuel tax in British Columbia, Canada, for trans-border and international flights.
  • Air Canada is increasing flights to Asia and Europe, taking advantage of the incentive program offered by the Vancouver Airport Authority.
  • The US airline industry has experienced a 53% increase in passengers between 1990 and 2009, with 2% fewer employees serving them.

Founder Bob Herbst ran the numbers and concluded that while the US Consumer Price Index increased by 64.1%, comparing 2009 with 1990, the cost of air travel declined by 9.9%. Of critical significance is the fact that this decline comes at a time when prices for other forms of transportation - heavily subsidized rail - have continued to rise.

The chart provides average passenger revenue per mile for US airlines, commuter rail, and Intercity/Amtrak travel as compared with the Consumer Price Index from 1990 to 2009.

"In 1990, the average passenger cost to fly one mile in the United States was USD13.4 cents," said Herbst. "Twenty years later, the cost was only USD12.7 cents per mile. During the last two decades, the average US domestic airline passenger fare measured on a per mile cost basis stayed in a range of 12.0 cents to 14.6 cents."

He pointed out that these numbers are revenue to the airlines and do not include government taxes, fees, security charges etc that are now approaching 30% per passenger fare.

Putting further pressure on airlines is the impact of frequent flyer and other promotional programmes. While much is made of the front of the cabin, analysis reveals that only about 25% of first-class passengers pay full fare. The rest are upgrades, frequent flyers and airline employees. Some 3.12 million free tickets are issued annually due to frequent flyer miles

The rising tax burden in the US comes at a time when the government of British Columbia is moving to eliminate the provincial aviation fuel tax for trans-border and international flights. In addition, the Vancouver Airport Authority (VAA) is offering a five-year incentive programme allowing air carriers to add capacity to YVR without incurring additional landing and terminal fees. The move prompted both WestJet and Air Canada to boost flights from the airport.

Air Canada is increasing flights to Asia and Europe beginning this winter Hong Kong, Shanghai, Beijing, Tokyo Narita, Tokyo Haneda (beginning January 29, 2011), Seoul, Sydney, London Heathrow and Mexico City (weekend service begins November 1, with daily flights effective December 1, 2010). Daily non-stop flights to Frankfurt and three times weekly non-stop flights to Auckland are offered on a codeshare basis with Star Alliance partners Lufthansa and Air New Zealand, respectively.

The BC government is about to introduce legislation eliminating the tax and hailed the move. "We are pleased with the progressive approach taken by the BC government and thank Premier Gordon Campbell for his vision and the positive impact this news will have on making British Columbia more competitive for international and transborder flights," said President and CEO Gregg Saretsky. "I commend the government for taking action to improve the competitiveness of BC's aviation industry within the international market. The announcements by the BC government and VAA demonstrate a great collaboration between government and airport authorities."

Saretsky said the VAA programme will allow WestJet to grow it services there even more. "WestJet's international presence in British Columbia has grown substantially and this news ensures that with firm orders for an additional 45 aircraft over the next seven years, this growth will continue," he said. "It is our belief that this news will create jobs and add millions of dollars of economic activity to the province. It is these types of initiatives we encourage other jurisdictions across the country to follow so that all of Canada's aviation hubs will become more competitive internationally." Herbst's analysis is nothing airline executives don't already know. Indeed, US Airways Chair Doug Parker makes it a point to drive home this message at every opportunity emphasising that airline fares still represent remarkable value in today's economy.

Herbst compared fares and the CPI. "If airline passenger travel costs had kept up with CPI inflation over the last 20 years, the average fare to fly one mile in 2009 would have been 22 cents per mile, a 59% increase over the actual cost," he said, adding that one of the most remarkable statistics is the fact that the industry now has 2% fewer employees to serve a 53% increase in passengers.

While he suggests this is driving the increase in complaints it is likely it has to do with far more than the number of employees.

Herbst outlined the changes in the industry between 1990 and 2009 with what he called "staggering" statistics.

  • In 1990 there were 460 million passengers. In 2009 there were 704 million passengers.
  • In 1990 there were 546,000 airline employees. In 2009 there were 536,000 airline employees.
  • The US airline industry has lost money in 12 of the past 20 years and accumulated a net loss of approximately USD29 billion (excludes airline bankruptcy and reorganisation write-downs).
  • The price of jet fuel for 2009 was at a four-year low and still 240% higher than the airlines paid in 1990.

Since January 1, 1990, there have been 98 US airlines file for bankruptcy.

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